By Mark St. Cyr
Like a broken record whenever a profit measure was asked of “Silicon Valley” (i.e., everything social or tech) as to when something would either be profitable or, begin returning investor cash with either net profits or dividends. The response was always the same “It’s different this time.” Meaning: there aren’t any now, but just you wait! Some are still waiting, and waiting, and waiting, and….
The only reason this retort was tolerated for as long as it had been is for that other “it’s different this time” meme that took hold in unison when it came to everything one thought they understood about investing, free markets and capitalism itself: quantitative easing e.g., QE.
As long as the Fed. enabled “free money” to chase momentum plays – the gravy train to cash-out-riches was running on rails. Yet, here too investors, savers, and more would ask “When does normalization type policies begin that benefit the prudent balance sheet or fiscally responsible?” And here the retort was much same, “Not now, but just you wait!” And again they too are still waiting, and waiting, and waiting, and…
Of course the answer to the question of why we’re waiting is, you guessed it – “it’s different this time.” Four words that replaced a teenager’s one word answer to everything: “Because!” But that’s what a Ph.D is for I guess – making the simple more complex. But I digress.
However, today there are visible cracks showing in the armor of that once fool-proof defense. Everywhere you look (but you have to open your eyes too see) the once celebrated IPO cash-out where dreams and fortunes are made regardless if the business model works, stable, or is even viable, has been all but erased 4 months into 2016. And how much longer it goes on is anyone’s guess.
As we stand today, as of this writing, there have been zero IPO’s of any “unicorns.” Zero, as in zip, zero, nada. Why? Is it – different this time?
It seems too me the deciding difference is more of the same old, same old. i.e., Without QE’s enabling “hot money” for momentum chasing – net profits matter. Not “net-eyeballs” for fairy-tale story telling. And net profits today are as rare as the vaunted unicorn itself: mythical. Unless it’s Non-GAAP, then as they say “You’re crushing it!”
Today, investors of all stripes seem to be no longer buying into myths. At least not without “free money” (e.g., QE) that is.
“Eyeballs for ads” (aka – user growth etc., etc.) has been the celebrated metric used and touted for everything social et al from its inception. Not sales, not profits, nor a whole lot of other business centric measurements as to the health and viability of an enterprise. No, like a broken record only user growth metrics (i.e., eyeballs) mattered. Yet, there’s currently a very, very, very (did I say very?) big problem with this whole “eyeballs” or “user growth” defense. The issue is: The fairy tale metric has morphed into a real-life counter factual that can no longer be hidden. And this nightmare is growing day, by day, by day, and by day. Let’s list a few shall we?
Regardless of how a next in rotation fund manager, economist, think tank alumni, or Ivy League’d Ph.D professor et al wants to justify these “markets.” Anyone with a modicum of business acumen understands there’s no fundamental business reason or metric that logically explains why we should be at these heights. None. It’s a fairy-tale story based on a mirage as its factual base. All smoke and mirrors supported via a cohort of complacent onlookers, along with, just as many fervent believers hoping, and praying that this “Never-land” can exist forever. Do I need to remind you that even the Bank of Japan’s governor Mr. Kuroda actually uses the term “Peter Pan” to describe his monetary thesis? Welcome to monetary policy 21st century style. Remember – it’s different this time.
Yet, how is it, here we are within spitting distance of the all time, never before seen in human history highs and: there hasn’t been a one? Not any unicorns cashing out? None in all of 2016 thus far? How is it different this time? Why is it different this time? How can all this good in the markets be so bad not only for the “eyeballs for ad dollars” based social everything genre, but all IPO candidates in general?
Oh right, I forgot. Not to sound like a broken record but “it’s different this time.” I would suggest this time, is a looking a lot like last time. Can you say A – O – L? Many can – they just won’t.
Another point is; when it comes to that cashing-out IPO stock option dream and picking up a San Francisco McMansion on the cheap at $5 million or so. Those dreams are beginning to take on more of a realization that a shipping container reality might be here to stay far longer than first anticipated. Or, if you’re lucky, you might find a nice place in some box, or under some stairwell or crawl space to rent while you wait for that “just you wait!” IPO announcement we’re told is coming any day now.
Only issue? Hopefully that box, or room in a McMansion isn’t rented from someone who is also waiting. Or, you may find they’ll need to use that space eventually for themselves as they list their bedroom on AirBnB™ to help foot the bill. But not too worry. For they’ll state, “It’s just any day now!” when they’ll cash out their shares with ____________ (fill in the blanks) unicorn’s IPO. If it ever does – at a value that pays. After all: there’s always next quarter, right? Just like earnings. But again I digress, sorry.
How about some past unicorn cash outs? How are they doing? Twitter™? Linkedin™? Square™? If you hold shares in these companies you should be crushing it when it comes to your portfolio. After all, these companies have seen their shares hurt “unfairly” as many a Silicon Valley aficionado or next in rotation fund manager will attest. So, with a historic rise that dwarfed all previous measures prior in the “markets,” with the best recovery ever (yes, ever) in a quarter in the stock markets history. The share prices of these companies should be on fire, no?
No. In actuality if you still own shares I would surmise the description would be more in kind with underwater, or drowning in a sea of red, yes? Well remember, it’s different this time, right?
But these are new business models we’re told. It is us or you that “just doesn’t get it” when it comes to all these new businesses emanating from tech. Disruption is the key! Profits come later, making net profits much later (if ever!) It’s all about “eyeballs for ads.” Once they get that user growth model back on track just you wait!
Well we’re still waiting, but more importantly, Wall Street has been waiting and has clearly shown it’s losing its patience. And for many, not only are they no longer willing to wait. But more importantly: They’re either pulling out, or turning a blind eye to “eyeballs” entirely. Now it’s, “Where’s my money or, I’m showing you the door.” And it’s gaining ground daily.
There’s no better example today than Yahoo™. Here’s a company only a mere 3+ years ago was heralded with its hiring of Marissa Mayer as CEO, its stake in Alibaba™, along with its “eyeballs for ads” count was, and still is, one of the highest on the web. Today? Now that QE is no longer, the only thing worth keeping (as to sell) seems to be its stake in Alibaba. Although at a far lower value than they were from its own IPO heights.
How valuable is all that “eyeballs for ads” goodwill? As the ole saying goes: “How much you got?” For it seems via the rumor mill it isn’t going to take all that much to acquire it. Talk about a diminishing value. As for being a board member? That now has a life expectancy of “how long before you can move out?” And as for its once high flyer, party throwing CEO? Maybe LinkedIn will be her next ticket to fame. No, not as an executive – but as a job board participant. Oh and by the way, LinkedIn shares are still on sale – and nobody seems to care. Except those with double-digit percentage losses. But alas, once again, I digress.
It seems she’s just the latest in an ever-growing list of “social everything” brilliance – as long as there’s QE to supply the brain power. And the debacle at Yahoo is just the latest of the oldest names. For I believe: It’s coming to the “new” in much the same fashion and will snowball even quicker. And yes, even with the markets at these levels. Why? Easy…
The fairy-tale can no longer withstand reality. Net profits, and return of money and/or investment matters. Period. Unless…
You’re one of the fortunate that is somehow already located within an index fund that is targeted and/or held by either a central bank or sovereign wealth fund. If not? “There’s no soup for you!” (i.e., money to wait.) That time has now since passed for “it’s different this time.” And not the way the “Valley” has argued these last 6+ years. (And I believe that too is about to find itself in a whole ‘nother “it’s different this time” reality check in the very near future.)
The time of “eyeballs for ads” has peaked in my opinion. That story as I’ve argued over the years would unravel quicker than a sweater thread, and all it would take was when the meme of “it’s different this time” began being debunked by measurements the “Valley” itself couldn’t just talk over or spin away..
As a matter of fact I’m of the opinion that today: the more words used to protect the fairy-tale meme will actually work against it. I’ll finish with the latest example for anyone who wants to truly understand just how encompassing the “it’s different this time” narrative really has become and – to what extent.
There is probably no other industry that has been disrupted, broken, changed, and far more other ways than I can type – than music. And there has been no other business model in the “eyeballs/ears for ads” internet genre than streaming music services. Billions of listeners, billions of this, billions of that. Valuation touted of $BILLIONS, and more. “It’s the way of now!” “Streaming is it!” “Invest now or miss the boat!” “This is where the money of the decade is to be made!” And on, and on, and on. However, there’s a problem.
Remember how I implied “would unravel quicker than a sweater thread?” And all it would take was when the meme of “it’s different this time” began being debunked in ways so glaringly obvious without saying a word? Well, here is the latest fulfillment of that argument.
Streaming music; for all that it’s been touted to be; both the be all, and, end all of music. Along with why its business model would be the darling of investors everywhere. I ask you not only to contemplate this yourself, but also, think about how this one fact is going to play into the minds of not only current investors, but rather, those desperately needing new investors today for all that “cashing out” to take place tomorrow. Ready?
Vinyl sales, yes, as in those plastic looking arcane relics of yesteryear that adorn many a bar room wall or lie boxed is some grandparents basement hasn’t just made some resurgence that you didn’t read on you latest social media “eyeballs for ad revenue” of choice. No, this resurgence isn’t making such a comeback as to replace digital. However, what is has done is antiquated that meme of “it’s different this time” when it comes to those “eyeballs for ads” supported models. Ready? (If you’re an investor in one form or another of the “eyes for ads” model you might want to take a seat. Don’t say I didn’t warn you.)
According to the Recording Industry Association of America (RIAA) vinyl sales generated more revenue in 2015 than ALL the ads/advertising on YouTube™, Spotify™, and Soundcloud™ – Combined!
But what about all those eyeballs/and ears you ask? Sorry, but the pun just writes itself:
It’s differen..It’s differn…It’s differen…It’s differen…It’s differen…It’s differen…